Australian Business Confidence Drops in June

Accoring to NAB's monthly business survey, the confidence of Australian business operator fell to lows not seen since the September 11 terrorist attacks. Here are the highlights of the report:

• Business conditions deteriorated sharply and unexpectedly in June.

• Sustained slowdown in sales & profits begins to slow job gains & lowers capacity usage.

• Near term negative confidence weakens significantly further & forward orders subdued.

• Survey implies domestic demand up 2½-3% during 07/08:slower than Nab & most forecast.

• Economy-wide purchase costs rising a lot, while current inflation edging higher.

• Australian GDP growth is still expected at around 2¾% for both 2008 & 2009 – supported by personal income tax cuts, a rebound in farm output & stronger commodity prices.

• Substantial downside risks to growth at home & abroad, but sustained higher oil/ energy prices add to medium term inflation risks.

• RBA to look thru high inflation in near term & remain on hold for rest of 2008. Nab expects cuts to cash rate during 2009 in response to sustained slower growth & lower “core” CPI.

This report jibes with what we heard in both the PSI and PMI indexes released recently. Economic activity has slowed markedly in recent months, although as the chart at the top suggests, it has a long way to go to reach the recessionary levels of the early 1990's.

On the outlook for interest rates NAB had this to say:

Nab expects the RBA to look through the short run pick up in core inflation in the near term – including another large rise in both the core and headline CPI for Q2 (due to be released on 23 July) and remain on hold as demand moderates significantly further this year.

I concur completely. The RBA will take into account the lagged inflationary effects and instead concentrate on the slowing in domestic demand. Furthermore, NAB expects the RBA to cut interest rates between 100 - 125 basis points in 2009.